Demographic Change and Economic Well-being: The Role of Fiscal Policy

Good evening.President Reif, thank you for the kind introduction, and thank you to the students and faculty for your warm welcome.It is a tremendous honor to have the opportunity to deliver the Compton Lecture—and to be the first French woman doing so: Quel honneur et quelle responsabilité!In many ways, this marks a visit to “our” alma mater—and by “our,” I mean the “IMF’s” alma mater. It is quite remarkable that our last five chief economists received their doctoral training here at MIT.Kenneth Rogoff, Raghu Rajan, Simon Johnson, my compatriot Olivier Blanchard, and, of course, Maurice Obstfeld who took the helm of our Research Department last year. These economists are not only leaders in their fields, but they also embody the MIT spirit of intellectual honesty and openness and relentless curiosity.Through their work at the IMF, these MIT alumni have played a crucial role in promoting the global public good of economic and financial stability—which has been the Fund’s raison d'être for more than 70 years.Indeed, if the IMF had a motto it could be the image of the MIT motto—“Mens et Manus”, “Mind and Hand”.Both institutions are keenly aware that the best research—the grandest ideas—are those that can change our lives, our economies, our nations for the better. Both institutions are keenly aware that this requires rolling up one’s sleeves and tackling problems hands-on—in the lab, in the start-up venture, in the offices of policymakers who are looking to us for advice.In short, both our institutions are deeply committed to serving the world in the 21st century.

The role of demographics

When I look at our 21st century, demographic change is one of the first features that come to my mind. Think about it—the world’s population is at about 7½ billion people today. Forty years from now, it will be an estimated 10 billion inhabitants.1In some parts of the world—especially in South Asia and Sub-Saharan Africa—populations will continue to grow rapidly.Other parts of the world—including most advanced and emerging market economies—will face a momentous transition towards ageing and shrinking populations. Indeed, by the end of this century, about two-thirds of all countries are expected to have declining populations.This will have profound implications for economics, financial markets, social stability, and geopolitics.Without action, public pension and health systems will not be sustainable over the long-term. Our grandchildren would face unsustainable public debt and sharp tax increases that could stifle growth and reduce their economic well-being.As Albert Einstein once said:“The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”So we need to reframe the debate about demographics.I believe that this challenge can be met. But it requires the right policies, political resolve, and strong leadership. I will argue that the fiscal policy responses and technological innovation are especially important parts of the solution.

1. The two sides of demographics

So let us start by looking at the sunny side of demographics.Picture yourself getting together with your grandchildren! You may be in your 70s, but you are physically active and not afraid to impress the kids with your new Instagram account, or knowledge about gravitational waves.Well, maybe you have a different vision of the golden years, but surely we can agree on one thing: being able to lead long and healthy lives is a demographic dream come true. By any standard, this is one of our most astonishing achievements.

Life expectancy is upJohn Maynard Keynes, one of the two founding fathers of the IMF, coined the phrase “In the long run, we are all dead.” Happily, the long run is now expected to be even longer!Average life expectancy around the world has jumped from 47 years in 1950 to 71 years2 today. Of course, life expectancy varies greatly across regions—from a low of 61 years in Africa to a high beyond 80 years in northern America, Japan, and many European countries.Few people today would want to swap their modern lives for an earlier existence. In the late 19th century, for example, the typical American household could expect to see almost one in four of its children die in infancy, and people suffered from diseases that would be easily curable today.

The difference between then and now lies in a powerful combination of factors: improved sanitation, the introduction of antibiotics and vaccines, expanded education, and better infrastructure and health care, to name just a few.

Fertility rates are down

The increase in life expectancy and economic welfare that came with the industrial revolution brought with it the seeds of demographic change. In what we call today the advanced economies, it started with a pronounced drop in fertility rates in the second half of the 19th century that has continued today.At the risk of oversimplifying Gary Becker—from the University of Chicago, I am afraid—the decline in fertility rates was related to changes in economic circumstances that increased the financial returns to education.To put it simply, it became rational for families to invest in their children’s education, and families increasingly opted for raising fewer better-educated children instead of a larger number of children. There is also ample evidence that children of better educated mothers do better in terms of health and education. Educated women tend to have fewer children and devote more time to each child—while they enjoy broader opportunities in their own lives.This virtuous circle that started in Europe and the United States more than a hundred years ago is now widely seen across the world. The economic, social, and political implications are momentous.Fertility rates have come down—in 1950 the average woman bore 5 children; today she has 2.5 children (these are global averages). Over the same period, the global literacy rate jumped from 36 percent to 83 percent today.

Global per capita income is up

For one thing, increased investment in human capital has had a large positive effect on economic well-being. Average incomes in emerging market economies, such as China and India, have risen much faster than those in richer countries. Since the 1990s, the growth momentum has spread to more than 70 developing countries.As a result, global inequality—that is, income inequality between countries—has fallen steadily over the past decades. And global income per capita has nearly quadrupled since the end of the Second World War.Global poverty has also come down sharply. People living at or below the poverty line of $1.90 per day account for 13 percent of the world’s population, down from 44 percent in 1981.3 China alone has lifted more than 750 million people out of poverty over the past three decades.The bottom line: emerging and developing countries have been catching up with advanced economies in facilitating longer and more prosperous lives for their citizens.

The darker side of demographics

So what’s not to like? What is the darker side of demographics? Well, with declining fertility rates, populations in some advanced economies did not just grow more slowly; they stagnated, or began to shrink. The same will eventually become true for emerging and developing countries.Japan and Germany’s population, for example, started to decline some time ago. Even the world’s most populous country—China—has been facing a declining working-age population since 2012.In most cases, shrinking and rapid ageing go hand-in-hand. This is a demographic double-whammy that will have major implications for economic growth, financial stability, and the public purse.First—the impact on growth. For obvious reasons, older workers participate less in the labor market, and a country with an aging and shrinking population will therefore see lower growth over the medium term.Fewer workers also means less need to equip them with capital. And countries may become reluctant to upgrade their capital stock. Why build more infrastructure for fewer people?Our research suggests that the combination of aging and shrinking will reduce potential growth in advanced economies by about 0.2 percentage points in the medium term—and by twice as much in emerging economies.4 This may not look so bad, but it would be a severe blow to those countries that are already facing very low growth and high debt.Second—the impact on financial markets. Many see population aging as a significant drag on asset prices. Some even hypothesize that retiring baby boomers may trigger stock market disruptions, because they may liquidate their equity holdings to finance their retirement.This may or may not be true, but what we definitely know is that governments, pension funds, and individuals seriously underestimate the prospect of people living much longer than anticipated.IMF analysis suggests that, if everyone lived three years longer than expected, pension-related costs could increase by 50 percent in both advanced and emerging economies.5 This would heavily affect private and public sector balance sheets and could also undermine financial stability.Third—the impact on fiscal health. Again, IMF staff research shows that, in advanced economies alone, age-related spending is projected to jump from 16½ percent of GDP to 25 percent by the end of this century—unless policy action is taken.6 How can this challenge be met?

Through borrowing? If governments were to finance the entire increase in age-related expenditure that way, public debt would explode from an average of 100 percent of GDP now to 400 percent by the end of the century.

Through higher taxes? In our hypothetical example, this would mean lifting VAT rates by roughly 20 percentage points, or increasing social security taxes by about 25 percentage points.

Through drastic entitlement reforms? By our calculations, this would mean slashing pensions and health benefits on average by about a third.

There is a wide variety of country experiences, but broadly speaking, emerging markets and advanced economies face similar challenges. Without action, China’s spending on pensions and health care is projected to increase by 13 percentage points of GDP by the end of this century, compared to 15 percentage points in the United States.So what can policymakers do to tackle these daunting fiscal challenges?

2. Fiscal policy—the first line of defense

This is the point in the lecture where Groucho Marx would jump up and ask: “Why should I care about future generations? What have they ever done for me?”Of course, we do not need a comedian to remind us that voters and politicians rarely look beyond the next election, let alone the next 85 years.The question is—is there a quick fix, a silver bullet? The answer is: yes…and no.Common sense tells us that simply increasing the fertility rate could help. Many countries have tried to do just that—with baby bonuses, family allowances, tax incentives, parental leave, subsidized child care, and flexible work schedules.What is the result? Well, these measures have boosted the labor force participation of mothers—which is great news in and of itself—but they seem to have little or no effect on the number of births. So, bribing people to have children does not seem to work—at least in the aggregate.

Game changers

That is why we need a multi-pronged policy response. In other words, it is not enough to focus on just one aspect, such as pushing through a pension reform. We need game changers.

The first game changer is entitlement reforms. Start with health care—which accounts for the lion’s share of age-related expenditure increases.Increasing competition among insurers and service providers will help. But it also requires more targeted spending, paying more attention to primary and preventive health care, promoting healthier lifestyles, and making more effective use of information technology. For instance, costs can be reduced by making greater use of heath data history or using unique health identifiers for individuals.If these efforts can be sustained over many years, it would help governments to bend the cost curve.Another priority is lifting retirement ages to match longevity gains. This would bolster the pension system and extend the productive life of individuals. At the same time, however, policymakers need to put in place a proper safety net for those who might not be healthy enough to work longer.Pension systems also need to be flexible enough to respond to demographic shifts. The Japanese system, for instance, automatically slows the growth of benefits to offset increases in life expectancy and changes in the labor force. Other countries—such as Germany, Finland, and Portugal—also link benefits to life expectancy. Again, the sooner the reform, the fairer the adjustment.More broadly, in the current environment of already depressed aggregate demand, we need savvy fiscal policy—one that supports demand while ensuring sufficient savings in pensions and health care.The second game changer is better tax systems and more efficient public expenditure.On the tax side, this means broadening the base for value-added taxes, improving taxation of multinational corporations, and strengthening tax compliance—to ensure that everybody pays their fair share.On the spending side, there must be better management of public investment. Our research shows that the most efficient public investors get twice the growth “bang” for their “buck” than the least efficient.And, of course, energy pricing is key—not only for the public purse, but for the planet. This means more emphasis on energy taxation and less reliance on energy subsidies.We estimate that global energy subsidies amounted to $5.3 trillion last year, or 6.5 percent of GDP. This staggering number needs to come down so these resources can be better used. Doing it now, when energy prices are low, makes it that much easier.The third game changer is a broad-based push to lift potential growth—to increase the size of the pie. In the end, there is only so much that tax measures and efficient public services can achieve.One way to grow the economic pie is to add more workers. An obvious group are women. Scandinavian countries and, more recently, Japan have sought to raise female labor participation by offering affordable childcare, making tax and legal systems fairer for women, and promoting equal pay for equal work.IMF research indicates that raising female labor participation rates to those of men could increase GDP by 5 percent in the United States—and the numbers are even higher for many other countries.Another source of additional labor is immigration. Of course, the associated political and social issues are not to be underestimated. But from a purely economic perspective, immigration can boost a country’s labor force, encourage investment, and lift growth—provided that they are well integrated into the work force.Why is growing the economic pie so important? Not just so there is more to share now. Higher growth means a fuller public purse and a more potent fiscal policy response to this demographic challenge.There is, of course, an essential ingredient for growth—and that is raising labor productivity by using ever smarter technology. People here at MIT know a thing or two about that.

3. Technological innovation—a must-have for Methuselah

Indeed, MIT’s business is technological innovation, which is essential to raising living standards over the long term—so we can all “live long and prosper” [MD could give the Vulcan salute].Artificial intelligence, robotics, genetic engineering, 3-D printing, and quantum computing: these are only a few of the technologies that could profoundly affect our economic well-being in the 21st century.

Could these innovations revolutionize the allocation of labor and capital? “Yes!” say the optimists.I am thinking of Erik Brynjolfsson and Andrew McAfee from the Sloan School here at MIT, who argue that technical advances will have transformational consequences leading to accelerating productivity and increasing prosperity. In other words, the pie grows a good deal by itself and everybody enjoys more leisure. Please sign me up!Well, not so fast perhaps. There are also pessimists in this debate! First among these is perhaps Robert Gordon, who also got his PhD from MIT, under the supervision of Robert Solow, almost 50 years ago.Professor Gordon argues that the century between 1870 and 1970, was unique in inventing electricity, gas, the internal combustion engine, running water, sewers, telephone, antibiotics, and much else. In his view, the technical progress achieved since then—admirable as it has been—is simply not visible in productivity growth.Which of these views is correct? The short answer is: “Nobody knows.” What we do know, however, is that we need more innovation, not less.

Innovation is keyPowerhouses like MIT have been leading the way for decades, including through partnerships with major corporations.Governments also need to play their part—by removing barriers to competition, cutting red tape, and investing more in education and Research and Development (R&D). This would unleash entrepreneurial energy and help attract private investment in ideas that are new, surprising, and useful.In addition to supporting universities and research networks, governments typically provide subsidies for private-sector R&D. More investment in R&D means bigger benefits for the wider economy.New IMF research shows that, if advanced economies were able to ramp up private R&D by 40 percent, on average, they could increase their GDP by 5 percent in the long term.7Innovation is also critical outside the advanced economies. For example, China is today’s number one in the world in terms patent applications. And more and more multinationals outsource parts of their R&D to countries like Brazil and India.To be fair, most developing countries still rely considerably on the imitation and absorption of technologies from advanced economies.This is why we should encourage greater sharing of technology between the advanced economies and their emerging peers—including through foreign direct investment, trade reforms, investment in education, and a better enforcement of intellectual property rights.If this were to happen, it would be another global game-changer.

ConclusiónSo let me conclude with this idea of sharing.The life motto of Karl Taylor Compton, MIT's ninth president, was: “Leave every campground better than you found it.”We all know that we must address a huge demographic challenge, so we can leave our economies and societies better than we found them. We owe this to our children and grandchildren.I am confident that we can meet this challenge. We all have a stake in this campground.Thank you.

IMF COMMUNICATIONS DEPARTMENT

India seeks to boost its manufacturing industry and cut the trade deficit .

SHIPS leaving Nhava Sheva port, across the harbour from Mumbai, tend to ride higher on the water than when they arrive. India’s trading statistics explain why: steel and other industrial goods from China weigh down the ships as they come in, to be replaced on the way out by fluffy cotton bales, pills and—given India’s perennial trade deficit in goods—empty containers.

India’s economy grew by 7.5% last year, cruising past China’s 6.9% growth. Yet the deficit in goods trade with China continues to widen (see chart), to over 2% of GDP last year. For Indian policymakers this is an irksome reminder of the weakness of the country’s manufacturers.

Halving the trade shortfall with China would be enough to eliminate India’s overall current-account deficit, and thus the need for external financing..

The government’s ideas for shrinking the shortfall have been sadly predictable. The minimum import prices it imposed earlier this month on various grades of Chinese steel, which it claims are being “dumped” below cost, come on top of other anti-dumping levies and taxes on steel and myriad other products, from raw silk to melamine dinner sets. No country has used such measures as energetically as India over the past 20 years, according to the World Trade Organisation.The commerce minister, Nirmala Sitharaman, has called for a devaluation of the rupee to curb imports and boost exports. Yet the rupee has been falling against the yuan for years, with little effect on trade. And a weakening currency could revive inflation, which falling oil prices and sound monetary policy have helped tame.The government looks longingly at manufacturing’s 32% share of China’s GDP, roughly double the Indian figure. It sees factories as the ideal way to soak up the million-odd young workers who join the labour force every month. So it is showering sops on various industries. It is handing out subsidised loans to small-scale and labour-intensive industries such as ceramics and bicycle parts. Lightly-taxed “special economic zones”, many of which are set up to benefit a single company, are in line for further handouts.A “Make in India” jamboree in Mumbai earlier this month sought to present an image of openness to foreign investment, eliciting promises of multi-billion-dollar plants from firms keen to cosy up to policymakers. But India is trying to emulate China’s export-led manufacturing growth in a global economy that is now drowning in China’s industrial surpluses. It hopes to fill the vacuum left by its larger neighbour as Chinese wages rise, to double those of Indians, and its economy rebalances from exports to consumption. Yet so far it has struggled to seize that opportunity.Indian firms grumble, with some justification, about their products being shut out of the Chinese market. Agricultural products, of which India is a net exporter, are largely excluded from China through various phytosanitary rules. Indian pharmaceutical firms complain that China’s growing aid to other developing countries often includes the provision of medicines—Chinese-made ones, of course—which means that the recipient countries buy fewer Indian-made drugs than they used to..

India runs a global surplus in services, mainly by selling them to rich countries. But they are a small component of Indo-Chinese trade. China gets the best of tourist exchanges between the two countries: 181,000 Chinese tourists came to India in 2014, against 730,000 Indians who visited China. All this tortures Indians, for whom China is the biggest source of imports and third-biggest export market, but barely troubles China, for whom India is a second-tier trade partner. Indian policymakers are reflexively sceptical, for example, of China’s plan to build a road linking the countries, worrying it will only widen the trade imbalance.If China’s consumers won’t buy Indian goods, perhaps its businesses could build factories in India instead? Some big projects have recently been announced, notably a $10 billion industrial park to be developed by Dalian Wanda, a Chinese property group; and a $5 billion plant proposed by Foxconn, a Taiwanese electronics outfit which mainly manufactures in China. Foxconn said last July that it might employ up to 1m Indians in 10-12 plants by 2020, despite suffering labour strife when it closed an existing factory last year. However, foreign investors’ projects often fall quietly by the wayside when bureaucratic obstacles prove insurmountable. Foxconn is already said to be rolling back its ambitions.After years in the doldrums, India is enjoying its moment as the world’s fastest-growing large economy. That in itself will be enough to pique the interest of multinationals: Apple, for example, thinks a sales push in India can help make up for sluggish Chinese demand. Even so, it will be a while before its devices (whose assembly it outsources to Foxconn) are made in India. Instead, they will further weigh down the ships entering its ports.

- Gold has broken higher: Fear with a Capital F = Divergence with a capital D.- The dollar remains close to the highs.- The inverse historical relationship.- There are no rules in this game -- look at historical volatility divergences.- Fear can drive both higher in unison.

The best performing commodity of 2016 has been gold, hands down. The yellow metal closed 2015 at $1060.20 per ounce and on Friday, February 26 it was trading at $1224.90 -- an increase of $164.70 or just over 15.5% on the year. With the exception of high-quality government bonds, silver and platinum, everything else has moved lower. This tells me that we are in an environment dominated by fear. The increased interest in gold in 2016 has been the result of a flight to quality. In 2015, gold lost 10.46% of its precious value. In 2016, it has made all that back and more in the first two months.

The U.S. dollar is the reserve currency of the world. Beginning in May 2014, the dollar embarked on a road that has taken the currency higher. The U.S. dollar index futures contract has moved over 24% higher in less than two years. That is a very big move for the reserve currency of the world over a relatively short period of time. There is a historical inverse relationship between the price of gold and the dollar. In 2015, as the dollar moved higher, gold fell. However, given the current state of markets I can make an argument that even if the greenback continues to appreciate, gold can move higher at the same time. This would create a historical divergence, but 2016 has been the year for divergence in markets so far, so why not one between gold and the buck?

Gold has broken higher: Fear with a Capital F = Divergence with a capital D

Recently, Goldman Sachs told us that "the only thing to fear is fear itself" in terms of markets.

Gold immediately reacted by trading down to $1191.50 on the active month April COMEX futures contract on February 16, but since then, gold decided that fear is really the issue these days. Gold closed last Friday almost $34 higher than the lows after the Goldman dispatch and $39 off the recent highs. When it comes to markets, there is still a lot of fear these days; in fact based on the action in stocks, bonds, commodities and currencies during the first two months of the year, what we have is a case of fear with a capital F.

At the same time there is some real divergence within markets. Last Thursday, even though the Chinese stock market plunged, U.S. stocks moved higher led by crude oil, which seems to have developed a pattern lately. Oil has been falling throughout the day, encouraging shorts to come back to the market, and then it turns around in the last hour of trading and moves higher.

Crude oil closed last week at $32.78 per barrel amidst a sea of bearish fundamental data. It was up 82 cents on the week.

For quite some time, there has been divergence within the precious metals sector. Prior to last September, gold had never traded above a $200 premium to the price of platinum. In fact, in 2008 it was platinum that reached a $1200 premium to the price of the yellow metal. Platinum has always gone by the nickname "rich man's gold," but gold's precious cousin has not traded at a premium to gold bullion since December 2014.

Last Thursday, this spread traded at a new all-time low of a $320 discount for platinum under gold. It is hard to conceive that a precious metal like platinum that is ten times rarer, has a higher production cost and more industrial applications than gold could be trading at such a discount for so long. Perhaps metal is being dumped on the market by Russia, South Africa or possibly a long-term holder disgusted by the price action in what feels like a former precious metal. The current discount of platinum under gold, which closed at around $307 last Friday, qualifies as a long-term deviation from the mean with a capital D.

The curious relationship between platinum and gold is validated by gold's relationship with another precious metal, silver. The long-term monthly chart of the silver-gold ratio highlights another divergence in the current saga of the precious metals sector.

Last week silver moved to a new level against gold. The long-term average for this relationship is 55 ounces of silver value in each ounce of gold value. It has now moved above the 83:1 level, closing last Friday at 83.27 ounces of silver value in each ounce of gold value.

Silver closed on Friday at $14.765 per ounce. The current price of gold at $1224.90 suggests a silver price of $22.27 if the relationship were to return to its historical norm. That price is over $7.50 per ounce higher than the current level for silver. And that gold price implies a platinum price of $1424.90 -- $508 over the current price for active month April platinum futures, which are at $916.90 per ounce. These are gross examples of divergence with a capital D. Gold has divorced itself from its precious brethren with yet another capital D.

The dollar remains close to the highs

Meanwhile, the U.S. dollar remains in a trading range for the past year. The dollar index rallied strongly from the May 2014 lows at 78.93 to highs of 100.60 at the end of last November.

As the weekly chart highlights, the dollar index has been in a range between 92.52 and 100.60 for over a year now. It closed last Friday at 98.175 -- closer to the highs of the one-year trading range and its total range since May 2014.

A strong dollar is supported by the fact that the currency pays a rate of interest. The U.S. Fed raised the short-term Fed Funds rate above zero last December. It was the first interest rate hike in the U.S. in nine years. Negative interest rates in Europe and Japan and China's continued interest rate cuts are supportive for the greenback, which at least offers some yield.

The inverse historical relationship

When it comes to commodity prices, a strong dollar is a depressive factor. There is a long-term inverse relationship between the dollar and raw material prices. During the dollar surge, that correlation held and commodity prices moved lower. Gold was no exception. The yellow metal was down over 10% in 2015. However, 2016 seems to be a completely new ball game. Increasing volatility in markets has caused a divergence to appear between gold and the dollar. Now, gold is rallying in all currencies, including the dollar, due to the fear that grips all asset classes.

While the daily and weekly charts for gold display an overbought condition, momentum is higher. Additionally, open interest and volume have been rising with price and that is a technical validation of the bullish price action. The real signal that this move in gold is for real on a long-term basis comes from the monthly chart.

While the rise in open interest and volume is more prevalent on the shorter-term charts, the monthly pictorial of the gold price is compelling in terms of the development of a new trend for the yellow metal. Monthly momentum and relative strength are both positive on this long-term chart. Gold appears to be breaking out of the long-term bear market. In another sign of gold's strength, the equities of gold producers are fast approaching 52-week highs.

The move in the GDX-ETF since mid January has not only been impressive it has been astonishing. Technical strength in the price of gold and gold stocks has been accompanied by a resurgence of demand for physical metal. This is a triad of bullish signals for the yellow metal. All the while, the dollar remains strong and other precious metals, while higher on the year, are not following gold nor are they validating the breadth of the yellow metal's move over the past two months.

There are no rules in this game -- look at historical volatility divergences

I am a huge believer in inter-commodity spreads in terms of their ability to identify value and divergence. It took me a while to come on board the current gold train because of the lack of validation from other precious metals. However, 2016 appears to be a whole new ball game where traditional rules are out the window. After platinum moved to a $320 discount to gold last week, I realized that something much bigger could be unfolding in markets. The flight to quality is clear and Goldman Sachs is wrong about not having fear; gold is telling us to be very afraid.

In an interesting development: as of the close of business last Friday, the daily historical volatility of the price of gold is close to those for platinum and silver. This metric stood at 22.61% for gold, 23.05% for silver and 20.23% for platinum. Under normal conditions, the historical volatility of silver and platinum far exceed the level for gold. In fact, silver tends to trade at 150% of gold's volatility as a norm. Moreover, volatility in the platinum market can be scary at times with gaps and huge intraday moves. This is yet another example of extraordinary divergence within the precious metals sector these days.

When divergences abound, when traditional price relationships move to levels that are extremes and when things do not seem to make sense in markets, this creates a perfect storm for the oldest asset known to mankind -- gold. Right now fundamentals favor both gold and the U.S. dollar. Therefore, given the current environment, both are strong at the same time.

Fear can drive both higher in unison

The current environment of fear is a global phenomenon. In the U.S., moderate growth has caused short-term interest rates to edge higher via the central bank action late last year.

However, the stock market remains at a level that is higher than the norm in terms of price to earnings multiples. At the same time, Europe is an economic mess due to a variety of reasons ranging from unemployment and recessionary pressures to an ongoing immigration crisis. The British currency is falling apart as the nation decides whether to depart from the rest of Europe. Russia, Brazil, Australia and Canada are all suffering economic woes under the weight of low raw material prices. The Middle East is a turbulent region and an economic basket case due to the falling crude oil price. In Asia, Japan continues to show real weakness, while China is slowing, causing a contagious effect on the rest of the continent. Finally, in the U.S., the most contentious presidential election in my lifetime is kicking into high gear.

The bottom line in answer to the question of whether gold and the dollar can both appreciate at the same time? You bet your bottom dollar they can. In fact, given the current state of events around the world and in markets, this is looking more likely every day. Check out my podcasts at Commodix that provide a more in-depth and detailed analysis on the current state of markets.

Marvin Ellison has scored some early successes at the troubled department store, but there’s a lot left to fix.

Question: If you wanted to buy a pair of men’s shoes at a department store, would you look for them next to (a) Men’s Clothing, or (b) Women’s Footwear?

Most shoppers would probably answer “a.” But at J.C. Penney JCP14.35% , the 114-year-old retailing mainstay, the answer until very recently was “b.” Women make up about 80% of Penney’s clientele, and Penney managers believed that, generally speaking, those women were likely to buy shoes for their spouses and beaus, just as they did during the Kennedy administration.

“It was a terrible idea,” says Marvin Ellison, shaking his head as he walks a reporter through a Penney store in Frisco, Texas. “It took space away from women’s shoes, and it made it very difficult for men to want to buy shoes.”

Ellison, Penney’s newly minted 51-year-old CEO, had a better idea. He ran a test to see whether men’s shoes would sell faster when showcased next to, say, men’s suits; once the data showed that they did, he instituted that change last summer across the company’s 1,000-plus stores. Since entrusting guys to buy their own brogues and boots, Penney has seen double-digit sales gains in footwear. “That reset has been one of the smartest things we’ve done,” says Ellison.

This Frisco store, not far from company headquarters in Plano, north of Dallas, serves as Penney’s retail living lab, and as he continues the tour, Ellison proudly points out similar changes. Fashion jewelry now sits closer to its Liz Claiborne apparel brand, so women can try on accessories to go with a dress they might buy. The decor has been gussied up at the store’s traffic-driving in-house salons. Handbags got a face-lift too. After Penney failed to cash in on the recent handbag boom, managers did a deep-dive market analysis. Ellison’s conclusion: “Our handbags were ugly. We had to change them.” (It sounds less harsh in Ellison’s gentle Tennessee baritone.)

As the adage goes, “Retail is detail.” And if the details Ellison is addressing seem forehead-slap obvious, signs of how far J.C. Penney had fallen behind its rivals—well, welcome to his world.

Ellison became CEO last August with a mandate to plug the store’s countless leaks in operations, strategy, and technology, problems left over from the chain’s nearly fatal attempt to reinvent itself four years ago. He and Penney’s board are betting that such small but meaningful improvements will add up to a full recovery.

That now-infamous overhaul, under then-CEO and former Apple AAPL0.16% retail guru Ron Johnson, sought to reposition Penney as a flashier retailer with fancier merchandise. But it backfired: Customers fled, sales tumbled by almost a third, and Penney was crippled financially. Three years ago the board brought back Mike Ullman, the CEO it had unceremoniously chased out in favor of Johnson, to stop the U.S.S. Penney from sinking. And last summer he handed the reins to Ellison—an executive the opposite of flashy.

It’s fitting that Ellison, a lifelong musician, plays electric bass, an instrument that rarely gets a flashy solo but without which no band can click. He made his reputation in retail at Home Depot HD-0.47% , helping engineer that chain’s turnaround by focusing on unsexy but primordial things like the supply chain and the integration of stores and e-commerce. He’s a data devotee who grounds every decision in information—including that seemingly intuitive shoe move. “Pure intuition without any data gets you in trouble,” Ellison says. Referring to the Johnson era, he adds, “We went through 18 months of that, and we’re not going to do it again.”

Mike Ullman, photographed in 2005 under the watchful eye of founder James Cash Penney, steadied the ship. But Penney still lost ground to rivals.Photograph by Gregg Segal for Fortune

Ellison’s early results are encouraging. Penney reported a 3.9% increase in comparable sales during the 2015 holidays, one of the best performances in retail that season. (Rival Macy’s saw “comps” shrink by 5.2%.) That followed seven quarters of sales growth in the previous eight.

And although Penney hasn’t reported a profit since 2010—and hasn’t predicted when it will again—it’s aiming for $1.2 billion in Ebitda (earnings before interest, taxes, depreciation, and amortization) for fiscal 2017, nearly double the level of fiscal 2015.

The trees look nice, but the forest is daunting. Penney’s sales, an estimated $12.6 billion for the just-completed year, are still down 37% from their 2006 peak. Its nascent recovery, part of its fourth turnaround effort since 2000, hasn’t swayed Wall Street—its stock trades close to a 35-year low. In the long term, the problem isn’t just that Penney has been dysfunctional; it’s also that Penney is a department store, a practitioner of a business model under siege. It faces hordes of competitors in its core apparel and home-goods businesses: department-store rivals Kohl’s KSS0.32% and Macy’s M0.14% ; Target TGT-0.31% and Walmart WMT-2.25% ; discounters like T.J. Maxx TJX0.75% ; and, of course, Amazon AMZN0.01% . And consumers, especially younger ones, have lost interest in browsing at the mall. “The struggle is not going to end,” says Mark Cohen, director of retail studies at Columbia Business School. “The traffic that is off isn’t coming back.”

Ellison’s response has been to make Penney smarter and more efficient at keeping customers loyal and selling more to each one. That means embracing Penney’s mall-ness—and trusting that there’s still a place in the retail landscape for a mid-market department store. And if that means playing catch-up for a few years before making bigger, bolder moves, so be it. “We’re going to start with the foundation: No one can beat us being us,” Ellison says.

Turnarounds are nothing new at J.C. Penney. Founded in 1902 as a Wyoming dry goods store, Penney became one of the 20th century’s biggest department stores and catalogue retailers, dominating middle-American towns and suburban malls. But sales began to erode in the late 2000s. Penney was slower than rivals to emerge from the Great Recession and struggled with shrinking profit margins in its apparel business.

This was the situation Ron Johnson was hired to turn around. In 2012 he began a sweeping transformation aimed at shedding Penney’s stodgy image. He dumped its coupon program and changed everything from the logo to the checkout process. Most notably, he tried to make Penney hipper. Johnson dropped or de-emphasized several profitable in-house clothing and home-goods product lines, while trotting out cheaper versions of upscale brands like Michael Graves and Bodum.

The results have been widely chronicled (including in Fortune): The makeover bombed, sales plummeted, and some 40,000 jobs were eliminated. (Johnson declined to comment for this article.) In the spring of 2013 the board ousted Johnson and rehired Ullman, but the worst damage was done. The chain’s inventory management and e-commerce operations were in chaos, and Penney ended up with some $5 billion in long-term debt. The hindsight consensus was that Johnson had dismissed Penney’s core shoppers: middle-income suburban moms with neither the inclination nor the budget to worry about being cutting-edge.

If anybody can relate to those customers, it’s Marvin Ellison. Ellison, one of only five African-American CEOs in the Fortune 500, grew up in Brownsville, Tenn., a two-stoplight town between Memphis and Nashville that was segregated well into the 1980s. He’s one of seven children, and his family was poor. His father at one point worked three jobs at once, too proud to take government assistance. Still, the Ellison family would shop twice a year at J.C. Penney, first for back-to-school clothes and then at Christmas. The family also performed as a gospel act—and got its stage outfits there too. “Going to J.C. Penney was a big deal. It was something we looked forward to,” his older sister Virginia recalls.

The Ellison family, shown here in 1979, performed as a gospel act, in outfits bought at J.C. Penney. Marvin, with bass guitar, stands at the far right.Courtesy of J.C. Penney

Marvin’s father, an honors student, had to drop out of high school to support his family after Marvin’s grandfather suffered a heart attack at harvest time. The senior Ellison saw education as a way out of poverty and imparted a deep love of reading to his kids. Marvin developed big ambitions at an early age: The books he likes best are biographies of Presidents; Harry Truman is his favorite. He met his wife, Sharyn, when both were students in the 1980s at what’s now the University of Memphis. (He later earned an MBA from Emory, in 2005.) Sharyn, 47, says Marvin caught her eye as the only young man on campus toting a briefcase rather than a backpack. Date nights early on revolved around episodes of Dallas, the ultimate business soap opera.

Ellison’s retail career started during college, almost by accident. To help pay for books and rent, he took a part-time job as a security officer at Target at $4.35 an hour. That gig turned into 15 years at the retailer, as he climbed the ranks in theft prevention. Those early jobs gave Ellison a close-up view of how retail works at the store level, everything from the cadence of markdowns to the science behind keeping shelves stocked. But the jobs also taught him something that would shape his management style: Too many managers don’t listen to the troops on the frontlines, the workers in stores. Ellison had tons of ideas but didn’t share them with managers, he says, because they wouldn’t ask.

“Too many CEOs in retail like to be the smartest person in the room,” says Home Depot co-founder and former CEO and chairman Bernie Marcus. “Marvin’s not like that.” After Ellison joined Home Depot in 2002, he promptly sought advice from Marcus, who had recently retired. The two went on store visits three or four times a year to talk strategy and culture. Home Depot soon went through its own crisis, enduring lagging sales and plummeting morale under CEO Bob Nardelli. After Frank Blake replaced Nardelli in 2007, Blake became another advocate for Ellison, eventually naming him head of U.S. stores.

&amp;lt;strong&amp;gt;&amp;lt;/strong&amp;gt;

Blake credits his former protégé with helping fix Home Depot’s dismal customer-satisfaction ratings and turning the company from an e-commerce laggard into a leader. He also praises Ellison’s knack for galvanizing workers. In one memorable innovation, Ellison launched a weekly video feature on Home Depot’s internal TV station that showcased customer-service success stories. Blake compares them to ESPN’s SportsCenter highlights: “They provided a ‘Wow, that’s amazing’ element to work so that people could see how impactful their work could be … It makes the associates stars.”

“Everyone on the board knew Marvin would end up running a major retailer,” adds Blake. But it wasn’t to be at Home Depot. In 2014 the company chose Craig Menear to succeed Blake. Menear had been the chain’s chief merchant, which meant he had an edge Ellison lacked: extensive experience deciding which merchandise to sell and working with buyers to spot promising products. Such “merchant princes” tend to dominate the corner office in retail: Former top merchants currently run Kohl’s and Macy’s.

But that résumé gap didn’t stop Penney’s board from approaching Ellison that summer to be its future CEO. Mike Ullman, who was instrumental in the search, says that while Ellison may not know merchandising inside and out, he is self-aware enough to surround himself with people who do. “He knows who he is and exactly what he wants to accomplish,” Ullman says.

Penney announced Ellison’s hiring in October 2014, and since then Ellison has conducted more than 60 employee town halls and visited 100 stores. In a relatively uncommon hiring agreement, Ellison was designated to become CEO, but first would spend nine months as president under Ullman. The two men traveled the world, visiting vendors and partners so that Ullman could give Ellison a crash course in areas he was less familiar with, like apparel factories, sourcing, and merchandising. The Ullman-to-Ellison CEO handoff took place last August, but even today Ellison is constantly listening and watching, taking the measure of his colleagues.

Face-to-face interaction helped Ellison quickly spot disconnects between Penney’s executives and its store employees. Early on, he was irked to see senior management in stores wearing designer clothing far beyond the budget of a typical staffer or customer. A snappy dresser himself, Ellison implemented a rule requiring executives to wear J.C. Penney–made clothes when they visit stores and to wear the same name tags store workers do. (During the Frisco store tour, Ellison and the executives all wore Penney brands—Ellison and the other men in Michael Strahan and Stafford suits, a woman colleague in Worthington.)

Fashion choices weren’t the only issue on which management and staff weren’t connecting. One legacy of the reinvention fiasco was that inventory management was a mess. Senior management frequently felt that stores were sufficiently stocked, but in-store employees were constantly alerting Ellison to shortages. Management’s misreading was exposed on Black Friday weekend in 2014.

Penney rang up decent sales but left money on the table, as stores were out of stock of hot items because they had ordered too few. (One hint of the magnitude of lost sales: Penney ordered 330,000 pairs of women’s boots for Thanksgiving weekend in 2014 and ran out; in 2015 it ordered 1 million pairs.)

Inventory management is a challenge tailor-made for Ellison—part organizational, part technological.

His new tech team, which includes several of his former Home Depot lieutenants, has instituted “demand-based logic”: Rather than, say, automatically shipping 1,000 handbags of a given make to every store every month, Penney now replenishes inventory based on real-time sales data. (That may sound like an obvious fix, but, hey, remember the men’s shoes?) Ellison is also refining Penney’s pricing decisions by building databases to better synchronize markdowns and promotions with changes in demand.

Penney’s tech to-do list is lengthy, particularly in e-commerce. All Kohl’s and Macy’s stores offer same-day pickup for online orders, something that Penney is only getting around to this year. And with smartphones fueling 50% of digital traffic, Penney cannot afford to have what Ellison concedes is currently a subpar shopping app. Mike Amend, one of the Home Depot transplants, is hustling to overhaul it. His priorities: integrating coupons and other incentives so that the app can tell shoppers an item’s bottom-line cost. (Amend needs to hurry up—Kohl’s app already does that.) Coming later this year: handheld devices that will let store workers check customers out from anywhere in the store, not just the registers. These devices may look familiar to some shoppers: They’re identical to the ones used at Home Depot.

As Ellison sees it, Penney’s growth will come from getting a lot more sales from its existing customers. Penney says it now has 87 million active shoppers, the same as in 2011. (At its nadir in 2013, Penney had lost 20 million customers.) It posted average annual sales of about $155 a square foot in 2014—33% below their 2006 peak and well behind those of its competitors (see charts below).

To make its stores more productive, Penney can tap a host of enviable retail franchises. Take its 850 hair salons. Few people know it, but the J.C. Penney salon business is the largest such chain in the country; in some markets they’re the dominant salons in town, destinations for prom days and wedding weekends. The salons themselves generate almost 5% of sales. Even more important: Penney says salon customers are among its most reliable shoppers. As Ullman says, “You can’t get a haircut online.” The salonistas come in eight times a year—twice as often as the average department-store customer—and spend twice as much.

Many of the salons, frankly, look tired. But Penney signed a deal last year with InStyle magazine to rebrand and upgrade them, with a full rollout due to be completed this year.

(InStyle, like Fortune, is owned by Time Inc.) TIME-0.29% At the Frisco store the salon has been overhauled already, with slick signage, exposed-brick walls, and a bigger entryway designed to make it more visible and inviting. Penney hopes the rebranded salons will attract top-notch stylists who will, in turn, bring their clients—a new set of customers to woo.

J.C. Penney’s InStyle-cobranded hair salons. (InStyle, like Fortune, is owned by Time Inc.)Photograph by Nancy Newberry for Fortune

Ellison also plans to better coordinate the salons with Penney’s in-store Sephora cosmetics boutiques—veritable cash machines where annual sales per square foot are almost $600. Of course, many Sephora shoppers come in, buy lipstick and mascara, and walk right out. Ellison is betting that souped-up salons in proximity to Sephora will offer customers a reason to spend more time at the store and keep them off Amazon.com.

Another prong of Ellison’s strategy: expanding a strong suite of private-label clothing brands.

Penney-only brands in home goods and clothing together generate 51% of company sales; its top-selling attire brands include Arizona, St. John’s Bay, and Liz Claiborne. Penney is already a player in clothes for “big and tall” men, and it now wants a similar position in plus-size women’s clothing. But it also believes its brands could lure younger shoppers. That’s an existential priority: According to consultant Kantar Retail, the average Penney shopper is nearly 49 years old—up from 46.6 in 2011, and slightly older than the average at Target and Macy’s.

Ken Mangone, who oversees private brands, says Penney recently noticed that its a.n.a clothing brand was unexpectedly popular with younger women. Penney quickly developed Belle + Sky, a similar line intentionally focused on young shoppers, which it just rolled out to 500 stores.

Ellison also used Belle + Sky to accomplish another goal: faster turnaround times to compete with “fast fashion” leaders like H&M and Forever 21. Penney squeezed the concept-to-production cycle time to 25 weeks for Belle + Sky, compared with about 35 weeks on average for its apparel lines.

Penney’s in-house brands have one thing in common: They’re affordable. According to Kantar, the average household income of a Penney shopper is $63,412, vs. $69,000 or so at Target and Kohl’s and $75,274 at Macy’s. Memories of watching his parents stretch their budget help Ellison relate to a lower-income customer, he says. He recalls that at one point, to make ends meet, his studious and ambitious father took an extra job as a busboy at a Ramada Inn: “If you saw the guy with a bow tie on, serving drinks, you had no idea who he was if you didn’t ask.” The blue-collar crowd isn’t the market that looks sexiest to investors, but he’s adamant that Penney’s future hinges on it. “We can convince ourselves that our core customers are a more affluent demographic, but really, they’re not,” he says.

As we tour the handbags section in the Frisco store, an annoyed customer approaches Ellison and his name-tag-wearing co-execs. There’s nobody around to ring her up, she complains, and she had the same problem at the holidays. “Why don’t the four of y’all get some cashiers,” she says. A store manager quickly steps forward to help. But when one underling tells the woman that the store has been busy, Ellison snaps, “ ‘Busy’ and ‘bad’ are the same thing to the customer.”

In a sense, being “busy” is a sign of a broader contraction. As sales have declined, department stores have closed locations and reduced headcount, compromising service and fueling more customer defections. Industry trends like those fuel skepticism about Penney’s future. Retail experts speak of Ellison with admiration, but many see built-in limits to what he can do.

“Macy’s and J.C. Penney are fighting it out amongst themselves for a dwindling share of the market,” says consultant Robin Lewis, CEO of the Robin Report and a former head of Goldman Sachs’s GS1.35% retail practice.

Kathy Gersch, founder of consultant Kotter International, notes that J.C. Penney is “fixing the major problems,” but if it can’t become relevant to younger customers, “ultimately there is a ceiling.”

The decline of the American mall makes Ellison’s job harder. According to Green Street Advisors, 635 of Penney’s 1,020 stores are in malls, and about a third of those are in so-called C- and D-malls—locations with a lot of vacancies, which in turn hurt traffic for the remaining tenants.

(Penney has reduced store count by about 80 since 2012, but Ellison has resisted closing more.) Ellison’s biggest initiative so far is actually a play on the weakening mall climate. This year, for the first time since 1983, Penney is selling appliances, beginning with a 22-store pilot project. The decision is data driven: The stores realized that a lot of customers were searching for appliances on jcp.com. But it’s also a response to the fact that Sears SHLD4.22% , another mall anchor, is shrinking fast—giving Penney a chance to grab shoppers looking for a fridge.

Observers waiting for a big, splashy move from Penney will have to keep waiting. Penney’s debt, which generates about $400 million a year in interest costs, is a handcuff that impedes any major makeovers. Its capital-spending budget is about $300 million a year, a fraction of what Target, Macy’s, and Kohl’s each spend. While Macy’s has been plotting an international expansion, and Kohl’s plays around with incorporating virtual reality and robots on the sales floor, Ellison is stuck with prosaic tasks. In February he announced that Penney was looking into selling and leasing back its Plano headquarters to whittle down some of that debt.

Pressed on whether Penney can return to its 2006 apex, when it had $20 billion in revenue, Ellison punts, saying he’s not so concerned with a top-line number as he is with creating a profitable, sustainable business. “We’re not going to sit on our hands and play the same cards we played in the past,” he says. “We’re going to be a modern retailer.” But there will be no retail-rock-star pyrotechnics. For now Ellison is playing bass, providing a steady foundation that may, someday, get Penney back in the groove.

A version of this article appears in the March 1, 2016 issue of Fortune with the headline “The Man Who’s Re-(Re-Re)Inventing J.C. Penney.”

There is now a real possibility that the EU system for border and immigration controls will break down in about 10 days. On March 7, EU leaders will hold a summit in Brussels with Ahmet Davutoglu, the Turkish prime minister.

The idea is to persuade Ankara to do what Greece failed to do: protect the EU’s south-eastern border and halt the flow of immigrants. There is a lot of behind-the-scenes diplomacy going on between Germany and Turkey. The mood in Berlin, however, is not good.

The action taken by Austria, Hungary and other countries to protect their national borders has shut the western Balkan route along which migrants had made their way to Germany.

Refugees now find themselves trapped in Greece. Some may leave for Italy by boat. When those who survive the journey arrive there, I would expect Slovenia, Switzerland and France to close their borders. At that point, we should no longer assume that the European Council of heads of government is a functioning political body.

A refugee crisis that spins out of control could tilt the vote in the British referendum. There is no way the EU will be able to deal with two simultaneous shocks of such size. Coming at a time like this, Brexit has the potential to destroy the EU.

I do not expect such a doomsday scenario, but it is not implausible either. The EU is about to face one of the most difficult moments in its history. Member states have lost the will to find joint solutions for problems that they could solve at the level of the EU but not on their own. The EU’s population of more than 500m can easily absorb 1m refugees a year. No member state can do this alone, even Germany.The tendency towards national solutions is particularly pronounced in central and eastern Europe. Austria convened a western Balkan conference last week in support of its policies to restrict the number of refugees. Viktor Orban, Hungary’s prime minister, is holding a referendum to pre-empt a refugee quota-sharing agreement put forward by Brussels and Berlin. The Hungarians will surely support him.

Ms Merkel must take much of the blame. Her open-door policy was anti-European in that she unilaterally imposed it on her own country and on the rest of Europe. She consulted only Austrian chancellor Werner Faymann.

The EU is at risk of four fractures. I do not expect all of them to happen but I would be surprised if none did. The first is a north-south break-up over refugees. The so-called Schengen system of passport-free travel, in which 26 European countries take part, could be suspended indefinitely or become a miniature version comprising just Germany, France and the Benelux countries. Italy would not be part of it.A second north-south faultline is the euro. Nothing has changed here. Echoes of the eurozone crisis linger on and the Greek position is as unsustainable today as it was last summer.The third is an east-west divide. Will the open societies of western Europe want to be tied into an ever-closer union with the likes of Mr Orban or the other nationalists in central or eastern Europe?

Finally, there is Brexit. There is no way of knowing the outcome of the British referendum. The opinion polls are as useless as they were during last year’s general election.

More importantly, the debate has yet to start in earnest. Events will intrude; new facts or lies will emerge. A British vote to leave the EU may trigger referendums in Sweden or Denmark, adding further uncertainty.A refugee crisis spinning out of control is ultimately more dangerous for the EU’s future than a fragmenting euro. What makes the refugee crisis politically more fraught is that this time France and Germany are at opposite ends of the argument.

News, comment and analysis on the referendum to decide whether Britain will leave the EU.

At the Munich Security Conference earlier this month, I was not surprised to hear Manuel Valls, French prime minister, reaffirming his opposition to additional refugee quotas, but I was surprised to hear him criticise Ms Merkel directly. It was not France that invited the refugees, he said.The political impasse over migrants tells us that the EU’s open borders are inconsistent with national sovereignty over immigration. The member states will have to choose. They will choose sovereignty.After nearly 60 years of European integration, we are entering the age of disintegration. It will not necessarily lead to a formal break-up of the EU — this is extremely unlikely — but it will make the EU less effective.What is certain is that the refugee crisis adds a further layer of complexity to the British debate. It is not clear what kind of EU the British people are being asked to remain in, or to leave. Danger lies ahead.

The West is making its peace with Moscow’s incursions into Ukraine and Georgia.

By John Vinocur

Russian President Vladimir Putin and French President François Hollande in Paris on Oct. 2, 2015. Photo: Etienne Laurent/Associated Press

The traditionally tolerant Atlanticist Dutch—tough enough to be flying F-16 raids against Islamic State in Syria—will stage a national “advisory” referendum next month on whether the European Union should grant associate status to Ukraine. This looks like a noble gesture, a signal of backing for a want-to-be-in-the-West former Soviet satellite now facing massed Russian tanks and renewed gunfire.Except that consistent polling says the Dutch will tell the Ukrainians to buzz off when the Netherlands votes on April 6.For symbolism, this would be a “no” result weighing about a ton. It expresses multiple currents of contempt for the European Union. Even more, it argues that as a result of Russia’s unchecked military successes and effective hybrid-warfare techniques—in the Dutch case, involving little orange disinformation-men?—here’s a core European country that would look like it sees an advantage in placating Vladimir Putin. It’s as if the Dutch were telling themselves: “Don’t annoy him. He can flood the migrant supply line to Europe with a single afternoon of new bombing in Syria.” Stating that Russia “stood to benefit most” from a no vote, the president of the European Commission, Jean-Claude Juncker, has warned the Dutch that rejecting the Ukrainian association agreement “could open doors to a continental crisis.”Maybe not, but it would surely serve to illustrate the breakdown in political instinct and the self-obsession that grip EU members. The Dutch signaled a Europe that was sick in 2005 when, via a referendum, they rejected a proposed EU constitution. Now the linkage between contempt for Brussels and intimidation by Russia, involving its leverage on the flood of migrants to Europe, is noxious on a wider plane. It’s a miserable thought, but the Netherlands cold-shouldering Ukraine could mutate into a groundswell in Germany, where Russia’s annexation of Crimea has found a place alongside Moscow’s 2008 theft of two Georgian provinces on the list of willfully forgotten Kremlin conquests. These days, there are no consistent, respected European voices actively defending the probable necessity this summer of continuing the sanctions the EU has imposed on Russia. While both German Chancellor Angela Merkel and French President François Hollande appear battered, the recent fawning visits to Moscow of leaders from the parties of Germany’s grand coalition encourage more Russian provocation. The circumstances reflect a continent without a real locus of authority. The Frankfurter Allgemeine Zeitung has asserted that Germany’s moment of European hegemony ended following Mrs. Merkel’s substantial loss of allegiance on the migrant issue.And the Obama administration? Its self-imposed absence from influence on Europe intensified nearly two years ago when the White House saddled up a German horse to handle Ukraine diplomacy but disregarded its riders’ Russia-related limitations. In all of this, Ukraine remains Europe’s unwelcome case of conscience. “It’s an enormous irritant,” a Brussels official told me. “There are countries that think, ‘couldn’t Ukraine be bargained off in some way?’ ”There are signs pointing in that direction.German Foreign Minister Frank-Walter Steinmeier, and his new French counterpart, Jean-Marc Ayrault, were in Kiev last week. According to a German news report, Mr. Steinmeier told the Ukrainians that there could be “no more excuses” from them about the security situation blocking work on the subordinate details of the so-called Minsk plan for resolving the conflict. Which really signifies the unacceptable insistence that Kiev make concessions to Moscow without first gaining control of its side of its border with Russia and being rid of heavy Russian armament from the area. For atmospherics, note an article by the two ministers last week in which an unnamed “neighboring state” of Ukraine was said not to respect its sovereignty. But which one? Moldova?It’s in this tiptoeing context that NATO’s supreme commander, U.S. Gen Philip Breedlove, has warned the international community against accepting “the situation in Ukraine as the ‘new normal.’ ”In a statement, he spoke last week of Europe’s “somber reality,” its “growing instability fueled by a revanchist Russia” and of a continent that largely remains financially and economically “stagnated” while coercible through its dependence on Russian energy.But he’s just a military guy whose boss, U.S. Chief of Staff Joseph Dunford, has argued, without effect, that it would be “reasonable” for America to furnish Ukraine with defensive weapons.

It’s a reasonable conclusion. With borders on four NATO members, Ukraine ought to receive the American antitank weapons necessary to make a Russian onslaught against it a matter of unacceptable casualties for Moscow.

The Dutch, at least, can save their honor through a vote that suggests they understand how abandoned Ukraine has become. But with the diplomacy he delegated to Germany nearing a dead-end on Ukraine, President Obama continues refusing to supply this inadequately protected friend with a minimal means of dissuasion. It’s a stance that emphasizes his administration’s major part in the accelerated geopolitical implosion of the West.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.